The effects of anticipated and unanticipated demand movements on oligopoly conduct

Abstract

<p>Recent game-theoretic studies of the effects of demand movements on oligopoly coordination differ primarily in terms of whether demand shifts are anticipated or unanticipated. An empirical model is developed in this dissertation to test for the effects of anticipated and unanticipated demand movements. The model is estimated using rayon industry data from the 1930s, where the results suggest that coordination in the rayon industry was most difficult during periods when future demand was anticipated to be low and rising. Moreover, the results also suggest that the degree of coordination among rayon producers increased following significantly negative unanticipated decreases in demand;An extension of the basic model is developed by assuming that the degree of coordination is also dependent upon the present discounted value of expected future collusive profits. The estimation results from this extension suggest that coordination was most difficult when future rayon industry profits were expected to fall;Finally, according to several authors, it is likely that rayon producers used inventories to smooth production through-out the 1930s. Consequently, a simple stock-adjustment model is estimated, where the results support the production-smoothing role of inventories.</p>